A primer on the California sales/use tax manufacturing equipment exemption

Tax Executive, The, Sept-Oct, 1995 by Eric J. Coffill

Subject to the limitations set forth above, the exemption applies to gross receipts from the sale, storage, use, or other consumption in California of the following items:

1. "Tangible personal property" purchased for use by a "qualified person" to be used primarily in any stage of the manufacturing, processing, refining, fabricating, or recycling of property, beginning at the point that raw materials are received by the qualified person and introduced into the process and ending at the point at which the property has been altered to its completed form, including packaging, if required.(10) The regulation provides guidance on when raw materials will be considered to have been introduced into the process,(11) and also sets forth a definition of "packaging."(12)

2. Tangible personal property purchased for use by a qualified person to be used primarily in research and development, as defined.(13)

3. Tangible personal property purchased for use by a qualified person to be used primarily to maintain, repair, measure, or test any property described in items (1) and (2) above.(14)

4. Tangible personal property purchased for use by a contractor purchasing that property either as an agent of a qualified person or for the contractor's own account and subsequent resale to a qualified person for use in the performance of a construction contract for the qualified person who will use the tangible personal property as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, or as a research or storage facility for use in connection with the manufacturing process.(15)

The exemption is not available for property used primarily in administration, general management, or marketing. "Primarily' is defined to mean 50 percent or more of the time.(16)

B. Tangible Personal Property Defined

"Tangible personal property" is defined for purposes of the exemption to exclude and include certain specified items. Generally, the exclusions are the following: (1) real property, including tangible personal property to be incorporated into an improvement to real property (except for special purpose buildings discussed below), and conveyance systems and assembly lines;(17) (2) consumables with a normal useful life of less than one year (except fuels used or consumed in the manufacturing process);(18) (3) furniture, inventory, and equipment used in the extraction process, equipment used to store raw materials that have not yet entered or commenced the manufacturing process, or equipment used to store finished products that have completed the manufacturing process;(19) and (4) any property for which the California manufacturer's investment credit is claimed.(20)

Tangible personal property is then defined by the regulation to include, but not be limited to, the following: (1) machinery and equipment, as defined;(21) (2) equipment or devices used or required to operate, control, regulate, or maintain the machinery, including computers, data processing equipment, and computer software, and all repair and replacement parts with a useful life of one or more years;(22) (3) property used in pollution control that meets or exceeds standards established by the State of California or any local or regional governmental agency within the State of California;(23) (4) "special purpose buildings and foundations"(24) that either (i) are used as an integral part of the manufacturing, processing, refining, or fabricating process, (ii) constitute a research facility used during the manufacturing process as an integral part of a manufacturing, processing, refining, or fabricating activity, or (iii) constitute a storage facility used during the manufacturing process as an integral part of a manufacturing, processing, refining, or fabricating activity;(25) (5) fuels used or consumed in the manufacturing process;(26) and (6) property used in recycling.(27)